New business finance is the initial capital needed to start a business. Starting a business requires a lot of preparations and formalities. Business financing is the most important part of starting and continuing a business. Money is needed for a lot of purposes in business.
The entrepreneurs primarily need finance for the following reasons:
Money is required to buy or rent premises for the office to be built. Often, a certain amount of money is needed in advance for this purpose.
Infrastructure in the form of plant and machinery needs to be purchased.
Finance is needed to buy stocks and raw materials needed for production of goods and services.
Important business services like insuring the business also requires a lot of money.
Before payments of customers, money is required for providing financial cover.
Financing wages and salaries of first employees is absolutely essential even before the actual selling of goods and services.
New business financing sources can be divided into two parts based on their type. The Internal sources of new business finance can be obtained from the business itself from sales proceeds. The External sources of business finance consist of sources from outside of the business such as bank loans.
The ways of business finance are as follows:
Money borrowed from friends
Assistance in the form of grants from government institutions
The types of new business finance on the basis of the time for which the money is required are as follows:
Short Term Finance: Bank overdrafts are the best in this case.
Medium Term Finance: Here, the most popular means are grants from government, hire purchases, bank loans and lease
Long Term finance: The limited companies can finance their business through issuing of share. In general, bank loans, debentures and mortgages are very frequently used.
Making an estimate of the amount of money that would flow in and out of the business is absolutely essential before venturing out into business. It must be remembered that a business is the hardest to manage during the period of its inception and establishment.
Last Updated on : 1st August 2013